He’s One of the Nation’s Highest-Paid CEOs—and You’ve Never Heard of Him

One of the nation’s highest-paid executives is sitting on a massive pile of stock options and enjoys a private jet wherever he goes. Gary Rivlin on John Hammergren, the 1 percenter you’ve never heard of.

But so what if he made $145 million in a single year? The lion’s share of that money was the slew of stock options Hammergren cashed out after holding them for years. “That’s what you want,” Reda says. A new CEO gets a fat basket of stock options, and if the company does well, the CEO also prospers. “As long as the original stock-award amounts were reasonable, it makes no difference if it ends up providing a huge payoff,” Reda says.

Then I read him Hammergren’s annual total compensation payouts, taken from the company’s public filings with the Securities and Exchange Commission: $46 million in 2011; $55 million in 2010; $37 million in 2009; another $41 million in 2008. Hammergren hadn’t founded the company. Wall Street analysts covering McKesson can tell you of the disappointments and miscues that have marked his tenure. But his haul in the 13 years he has been running McKesson? More than $500 million, according to data provided by Equilar, an executive-compensation data firm.

John Hammergren, CEO of McKesson Corp., George Nikitin / AP Photo

For a moment, Reda is silent. “$40 million, $50 million a year is excessive, no matter what the yardstick,” he says. The average pay package for a CEO running a top 100 company these days, Reda says, is around $12 million. That includes everything, from salary to stock awards to contributions to a retirement account. Yet last year McKesson contributed more than $13 million just to Hammergren’s pension, according to company documents. Among the other perks he enjoys: a chauffeur to drive his company car, free use of the corporate jet for personal travel, and an extra $17,000 a year to pay for a financial planner because handling all those hundreds of millions is no doubt complicated stuff.

“He doesn’t leave anything on the table, does he?” Reda asks.

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John Hammergren isn’t necessarily the highest-paid CEO in America. Sure, he topped the list when GMI, a well-regarded research firm, published its 2011 annual CEO survey in December. But that’s because he cashed out $112 million in accumulated stock options in a single year, according to GMI. He ranked 14th on Forbes‘s 2011 executive-pay list and 22nd on its 2010 ranking. And of course there are CEOs like Oracle’s Larry Ellison and Google’s Larry Page. Page has a net worth north of $15 billion, and Ellison is worth more than $30 billion, but then each was a cofounder of the company he runs.

McKesson dates back to 1833, when Charles McKesson and a partner started importing therapeutic herbs and chemicals. It was more than 150 years later, in 1996, that Hammergren arrived at the company’s San Francisco headquarters. He had been hired to run the division that sells prescription drugs to hospitals, but then scandal rocked the company. Those behind a recently acquired company had inflated its sales numbers, and top McKesson executives were accused of conspiring to hide the fraud. (In 2005, the company paid $960 million to settle the resulting class-action lawsuit filed by shareholders.) “They had to give the CEO job to somebody, and basically he was the last man standing,” said an analyst who has been covering McKesson and its competitors since the 1990s. Many in the industry had never heard of Hammergren when he took over as president and co-CEO in 1999, this analyst said, “but I guess it’s better to be lucky than good.” Hammergren became sole CEO in 2001.

McKesson’s stock had hit a high of just under $95 a share but fell below $20 after the scandal broke. Hammergren deserves credit for stabilizing the company—some might even say he rescued McKesson—but a long-term shareholder could be forgiven for feeling that the company’s board of directors has been overly generous to its chief executive. As of Friday, the stock was trading at $78 a share—still off its 1998 high. Factoring in the regular dividends the company has paid over the years, a shareholder’s investment would be worth slightly more than it was 13 years ago.

Hammergren’s early compensation packages were fat but made sense, at least within the Alice in Wonderland world of executive compensation. The board kept his salary relatively low ($692,000 in his first year as president and co-CEO) but loaded his compensation package with stock options that would vest slowly over time. That’s Exec Comp 101. A board of directors dangles millions of stock options in front of a CEO, who in turn signs away his life in the hopes that he will grow extraordinarily, gloriously rich.